Mortgage crisis 'threat to economy'

Fed chief says home foreclosures could have spillover effects on broader US economy.

06 May 2008 12:15 GMT

The number of US homes entering foreclosure has risen 53 per cent over the 2006 figure [AFP]

"Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."

Bernanke did not talk about the interest-rate policy or the state of the economy.

'More relief'

On April 30th the Federal Reserve cut a key interest rate by one-quarter percentage point to two per cent and strongly hinted that it may take a break in its rate-cutting campaign that started last September.

To provide more relief, Bernanke again called on congress to give the Federal Housing Administration, which insures mortgages, more flexibility to help distressed borrowers at risk of losing their homes.

US financial crisis

US to enter recession later this year, with only mild recovery in 2009, IMF says

In April, US jobless percentage reached new high of 5.1 per cent

US Federal Reserve has cut rates seven times since last September in bid to halt financial slowdown

IMF says global losses from mortgage subprime crisis could top $945bn

Biggest losses include $18bn for Citigroup and $14.1bn for Merrill Lynch

George Bush, US president, signed $167bn stimulus package to combat financial crisis in February

Sources: IMF, company reports, US Department of Labour

He urged legislators to move ahead on legislation revamping Fannie Mae and Freddie Mac, which finance mortgages. And he called on the two mortgage giants to quickly raise new capital.

Some 1.5 million US homes entered into the foreclosure process last year, up 53 per cent from 2006, Bernanke said.

The rate of new foreclosures looks likely to be even higher this year, he said.

The reasons behind surging late payments and foreclosures can vary and that needs to be taken into account when developing solutions, he said.

For instance, parts of New England, states in the Great Lakes, including Minnesota, Michigan and Wisconsin, show increased mortgage delinquencies and "notable increases" in unemployment rates, Bernanke said.

California, Florida and parts of Colorado, on the other hand, saw delinquencies rise during a period when unemployment generally decreased but the value of homes declined, he said.

The current housing crisis has affected some borrowers home prices, leaving them with mortgages that are bigger than the value of their homes.

When that's the primary problem, Bernanke said, the best solution may be reducing the amount that the borrower owes on the loan or some other permanent modification to the loan.